Ping An to invest in Shenzhen Development Bank

The Chinese insurance giant moves nearer to its goal of becoming an integrated financial services company, and gives private equity investor Newbridge Capital an exit route.

Ping An Insurance announced on Friday that it is to become a strategic investor in Shenzhen Development Bank (SDB). The move will help the insurer achieve its goal of becoming an integrated financial services company, and will also boost SDB's capital adequacy ratio.

The acquisition of the SDB stake will be a two-part process. There is a private placement, in which Ping An will subscribe to new shares in the bank. As well as that, the insurer will buy the entire stake held by SDB's largest shareholder, financial sponsor Newbridge Capital, either for cash or through a share swap. Following the two transactions, Ping An will own no more than 30% of the bank.

Ping An will pay up to Rmb22 billion ($3.2 billion) for the stake if it pays entirely in cash. This is almost exactly the same amount that Ping An agreed to pay for Fortis Group's global asset management business early last year. The deal was terminated in October when the European bank was partially nationalised by the governments of Belgium, the Netherlands and Luxembourg.

In the private placement, Ping An will buy between 370 million and 585 million new SDB shares for Rmb18.26 each. The price is the average trading price of the stock for the 20 days prior to June 5, the day that it was suspended pending the acquisition announcement; and represents an 8.7% discount to the last trading price. The subscription shares are subject to a three-year lock up. The price for these shares will be up to Rmb10.6 billion.

Ping An will buy a further 520 million shares before the end of 2010 from Newbridge Capital, a subsidiary of Texas Pacific Group Capital. Newbridge acquired the shares in 2004 in a landmark deal that marked the first time in recent history that a foreign investor had bought shares in a Chinese bank. Newbridge had large plans for its investment in SDB, said sources, but was not able to navigate the regulatory framework in China. It is nonetheless making a healthy return on its investment; media has speculated it will make five times the initial investment.

The Newbridge stake represents 16.76% of the existing issued share capital of SDB. If Ping An pays cash, the transaction will amount to Rmb11.4 billion, which equates to Rmb22 per share. If it chooses to pay via a share swap, Newbridge will receive 300 million new H-shares in Ping An - one H-share for every 1.74 SDB shares it holds, which works out at Rmb26 per share. Newbridge will still own a 4.1% stake in Ping An when the deal is completed.

If the deal is completed before the end of 2009, the net asset value of SDB will increase to between Rmb6.7 billion and Rmb10.7 billion. The capital adequacy ratio will increase to between 10.7% and 12.1%. In March this year, the bank's CAR was just 8.5%, which is below the 10% regulatory minimum.

Along with its stake, Ping An will gain the right to nominate three candidates to SDB's board of directors, including one independent director. For 18 months after the completion of the deal, Ping An will also have the right to nominate three more directors to replace directors that resign. The appointments will have to be approved by shareholders.

Ma Mingzhe, chairman and CEO of Ping An, said in a written statement that the move is in line with the insurer's strategy to develop an integrated financial platform which incorporates insurance, banking and investment. By investing in SDB, Ping An will be able to work closely with a commercial bank with national reach, which will help the insurer offer multiple products to customers via one account.

Ping An does not have a banking presence in 14 of the cities where SDB operates, but the insurer does offer insurance products in these cities. One of the main synergies from the transaction is the opportunity to cross-sell banking and insurance products. At a shareholder meeting recently, Ping An is reported to have told shareholders that it would be cautious with respect to overseas investments, making the China deal an even more compelling opportunity for the insurer.

Since Newbridge invested in SDB in 2004, the bank has increased its total assets by 1.6 times to Rmb520 billion. Its non-performing loan ratio is 0.61% and it has a provision coverage ratio of 130%. It now has 286 branches in 19 cities in China. It was the first Chinese bank to gain approval to conduct an offshore online banking business.

Goldman Sachs and CICC were financial advisors to Ping An on the deal.

¬ Haymarket Media Limited. All rights reserved.
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